UK: TUPE - pre-transfer beneficial changes to terms are void

The EAT has ruled that a variation to an employment contract will be invalid where the sole or principal reason for the variation is the transfer, even if the change is to the employee's benefit.  The ruling will be welcome news for clients and incoming contractors on a service provision change, as it will render ineffective the use of "poison pills" by an incumbent contractor attempting to discourage bidders by enhancing employment terms and costs just before their contract ends.

In this case, employee directors of a transferor company had varied their own employment contracts, by adding generous guaranteed bonuses and termination payments applicable only if the transfer went ahead, shortly before a service provision change.  The EAT held that the variations were by reason of the transfer and therefore void and unenforceable against the transferee.

TUPE expressly provides that a purported variation to an employment contract will be void if the sole or principal reason for the variation is the transfer (unless there is an ETO reason ie, an "economic, technical or organisational reason" entailing changes in the workforce).  However, Government guidance and previous case law had suggested that this did not apply where the changes were to the employees' benefit, so that employees could in effect cherry-pick the most beneficial terms from their pre-transfer contract and the new contract.  The EAT disagreed, noting that the earlier case concerned the 1981 version of TUPE which did not contain the express provision rendering variations by reason of a transfer void.  The EAT noted that the EU Acquired Rights Directive (which TUPE implements) does not require or prevent domestic legislation that treats such variations as void, and it was influenced by the ECJ's comments in recent cases that the Directive not only seeks to protect employees but also to ensure a fair balance between the interests of the transferring employees and those of the transferee.

The EAT also ruled that the tribunal was entitled to find the terms void on the alternative ground that the variation involved an abuse of EU law.  The variation was intended to foist onerous new terms on the transferee by misusing a law aimed at protecting employees' rights and to thereby obtain an improper advantage, rather than for any legitimate commercial purpose.

In this case the variations were made pre-transfer.  Post-transfer variations are less likely to fall foul of the abuse of EU law principle, but pursuant to the main ratio for the decision will still be void if the sole or principal reason is the transfer (and not an ETO reason).  Parties seeking to rely on changes agreed post-transfer may need to focus on establishing a commercial reason for the variation which can be distinguished from the transfer itself, or in some cases may be able to argue estoppel.

The decision also confirms that where a claim for failure to inform and consult under TUPE is brought by an affected employee (in the absence of union or employee representatives), they may only do so on their own behalf and not as a representative for any other employees in a similar position to their own.  Compensation can only be awarded in respect of the individual claimant.  This is in line with earlier case law on the analogous provisions on collective redundancy consultation. (Ferguson v Astrea Asset Management)